During the run-up to the 2020 elections, the Joe Biden team campaigned on four key policy areas:
1. Economic recovery (How the US rebounds from the economic effects of the Coronavirus)
2. Covid-19 (in particular, the distribution and production of Covid-19 vaccines)
3. Racial equity &
4. Climate change
The fact is that the Biden housing policy (under the economic recovery plan) affects you no matter the scale of real estate investing you do. For example, the eviction ban was recently extended to June 30 as a way to keep tenants in their homes (not such good news if you’re a landlord). This article would consider some of the most pressing questions many real estate investors have about the Biden housing policy and attempt to answer them.
How does the Biden tax plan affect my real estate investment?
President Biden will fund hefty new projects within an estimated 15 years via personal and corporate tax hikes and measures designed to stop diversification of profits. As an investor earning more than $400,000 a year, you will pay 2.6% more in taxes on cash flow returns, since the top marginal tax rate would increase from 37% to 39.6%. Biden’s tax plan would impose a higher tax rate on the sale of properties for people earning over $1 million annually and on the sale of inherited properties by eliminating the stepped up basis. Capital gains taxes will revert back to the normal income tax rate of 39.6% for sellers earning over $1 million annually.
Capital gains taxes on inherited assets would also be based on the full fair market value of the property after the testator’s death. Like-kind exchanges or 1031 exchanges would be eliminated for high net worth investors. This means that you may not be able to defer capital gains taxes when you purchase a property with the proceeds of a like-kind or higher-priced property. Itemized deductions could also be phased off for you if you earn more than $400,000 a year.
See how the Biden tax plan affects you as an investor and what you can do.
What is the American Rescue Plan? And what does the $213 billion allocated for housing entail?
President Biden, under the American Rescue Plan, proposed a $2 trillion infrastructure plan, $213 billion of which would go into housing programs. During the run-up to the election, President Biden focused on affordable housing as one of the main selling points of his campaign. Therefore, the Biden housing policies would put resources towards an affordable housing program for low- and middle-income families and first-time homebuyers.
President Biden has promised first-time homebuyers a $15,000 down payment assistance via a refundable and advanceable tax credit. The housing facet of the American Rescue Plan also includes the construction and rehabilitation of over 500,000 low-rent apartments in low- and middle-income neighborhoods, along with the construction and renovation of millions of Section 8 housing units. Biden also proposes to curb restrictive zoning laws, especially single-family zoning laws, to help reduce new construction costs.
Could the Biden housing policy come into play? If so, when?
Much of the Biden housing policy will be funded by an increase in corporate and personal taxes (for high-net worth individuals). While the House has a 50-50 split between Democrats and Republicans, President Biden needs to win the support of Republicans to pass most of his policies.
On the other hand, Democrats could attempt to pass the bill via Budget Reconciliation. This allows Democrats to leverage the Vice President’s vote to break the tie and pass the bill without Republican votes. However, almost all bills in the enate are subject to a filibuster, which requires legislation to receive 60 votes before reaching a final vote.
If budget reconciliation wins, we may see the Biden housing policies take effect in August 2021. House Speaker Nancy Pelosi cited July 4 as the date she would like the $2 trillion infrastructure plan approved.
What would be the effects of an increase in Section 8 housing on the market?
Under the Biden housing policy, more funds will be allocated to local housing authorities to ensure that tenants pay no more than 30% of their gross income in rent. $5 billion per year would be directed to limiting rents to 30% for middle-income tenants who don’t qualify for government housing.
For professional developers and investors who specialize in affordable housing, project-based Section 8 requires landlords to offer a given number of units at Section 8 rental rates. Unlike gentrification, where low-income neighborhoods receive an influx of wealthy developers and investors, driving up prices for long term rental properties and driving out low income earners altogether, project-based Section 8 housing incentivizes builders to create low-income housing for rent in pricy neighborhoods.
While tenants pay reduced rent to the landlord, the landlord receives government subsidies and benefits, primarily in the form of tax credits. The Biden administration wants to expand low-income housing tax credits by $10 billion. Under the Affordable Housing Act, properties sponsoring housing help via low-income housing tax credits (LIHTCs) are subject to a 15- to 30-year affordability period, during which the property value is set at below market rates.
With tenant-based Section 8 or housing choice voucher programs, landlords were not required to rent to tenants with vouchers. When they do, they receive direct subsidies deposited every month into their accounts. Another proposition of the Biden housing policy is introducing a fair housing law that would prevent landlords from discriminating against tenants who receive housing benefits for traditional rental properties.
With some US cities being segregated by race and income, Section 8 housing might be a silver lining. Yet, an increase in Section 8 housing could have a direct impact on residential property values. According to a report by Eric Reenstierna Associates,
“Section 8 subsidies have micro and macro impacts on residential property values. From an appraiser’s or owner’s perspective it is important to remember that while Fair Market Rent governs the income stream of the subject being valued, it may differ from the prevailing rent in the surrounding neighborhood. In low-rent neighborhoods that are transitioning upward, Section 8 can create upward pressure on unsubsidized rents, increasing the values of comparables. In downwardly transitioning urban areas the opposite may be true.”
Want to find the right location for your real estate investment? See how to perform a real estate market analysis.
Could the Biden housing policy cause a housing market crash?
Political stalemate may block some of Biden’s proposed policies, especially plans like the elimination of the stepped up basis since real estate has always been a way to pass on generational wealth. The extended rent moratorium and foreclosure moratorium, if not properly handled, could lead to a homelessness situation later on, especially among minority groups.
But incentivizing investments in affordable housing and helping first-time buyers with down payment might lead to real estate price stabilization in red-hot markets where there is currently an housing shortage. And given that mortgage rates are still low and unlikely to rise sporadically in the near term, it’s unlikely that the Biden housing plan will lead to a market crash.
To learn more, see these expert housing market predictions 2021.
All in all, the Biden housing policy is expected to affect different markets and different property types to a varying extend. Thus, if you’re thinking of starting a real estate business in 2021, it’s important to conduct diligent real estate market analysis to find out how your market of choice is expected to perform. To start searching for the best locations to invest in and the most profitable traditional and Airbnb rental properties in the US market, sign up for Mashvisor.